Budget 2018: lacking vision and values

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The Federal Budget is a reflection of the vision and values of the government of the day. So what does the 2018 Budget say about Australia’s current leadership and the direction it’s setting for our nation? Australia21 has unpacked the policy decisions and the messages they convey, as well as the post-Budget commentary. Now Chair, Paul Barratt, delivers our verdict.

Any government’s annual budget is an expression of how it proposes to deal with scarcity – the inevitable fact that there can never be enough money for any government to provide all the services that the population it serves would like. Accordingly, it must make choices about what it will do, how much it will do in each area, and how much it will ignore.

The government must also decide how its Budget will be paid for. How much will be financed by debt and how much by taxes, and who will pay those taxes?

The choices any government makes are on full display on Budget Night, and the Budget is inevitably a revelation of what it holds to be important. It’s also an expression of how strategic the government is. Is the Budget a grab-bag of measures that are a response to external stimuli, designed to meet the government’s short term political needs? Or is it a reflection of a long-range vision, designed to deal successfully with the underlying forces that are bearing down on us, making it easier to deal with those forces in the future?

The Budget is also an expression of how forthright the government of the day is prepared to be with its public. Is the Budget a transparent presentation of the nation’s financial position, or are there creative accounting tricks that we need to be aware of?

Sadly, we have to say we find the latest Federal Budget wanting in many of these respects.

Australia21 is an organisation that encourages sustainable long term policies designed to create a better Australia, so we always hope the annual budget will be informed by a long term vision of where the government wishes to take Australian society. Rather than simply being a laundry list of tax and spending measures, it ought to be the annual announcement of what will be spent this year in pursuit of that long-term vision, and in the light of the prevailing and anticipated economic circumstances. We are most concerned with the long-term structural elements of the Budget rather than the impacts of short-term measures; our primary focus is the forces on the Australian economy and society that the Budget sets in motion, sustains, or protects us from. In that regard, we don’t think there is a meaningful distinction to be drawn between the economy and the society. Our citizens and long-term residents deserve to be treated as more than economic units.

With this in mind, Australia21’s Budget priorities would be different from those of the Turnbull government in 2018.

Our priority: Reducing inequality via a better deal for the unemployed, and investments in education and the public health system.

How the Budget measures up:

That Newstart remains frozen is a major disappointment. Like many in business, including the Business Council of Australia, we believe that the low level of assistance currently being provided to the unemployed does not act as an incentive for people to find themselves a job, but instead it reduces them to a level of poverty which makes it more difficult to find work. Furthermore, we believe that such punitive assistance levels will have an adverse long-term effect on their morale, self-confidence and physical and mental wellbeing, as well as that of their children: the difficulties of living in economic hardship have been associated with deficits in cognitive and academic performance, impacting on the cost of public health and the capacity of future generations.

The proposed elimination of the second highest (37%) tax bracket is a regressive measure that will exacerbate inequality. It is hard to see how people on $200,000 per annum paying the same marginal rate of tax as those on $40,000 per annum can be justified. Indeed, Australian National University modelling for Fairfax Media shows that the Turnbull government’s tax cuts — framed in the 2018 Budget as being targeted at low and middle income earners — will provide the most benefit to the highest earning Australians once they are fully implemented by 2027.

Inequality between the generations is exacerbated — there’s lots of help for baby boomers, but very little for their children and grandchildren. To that picture must be added the deferred cost of serious action on climate change (see below).

Post-secondary education and training are very important measures to combat inequality. The measures to limit expenditure on tertiary education places and TAFE are of great concern in this regard because their impact is disproportionately on poorer students and regional students.

Our priority: Enhancing the nation’s resilience. Resilience refers to the capacity of a complex system (like the Australian economy, for example) to withstand a shock and continue to perform its intended function (to access our research and publications on resilience see here).

How the Budget measures up:

Paying down debt is a very important way of enhancing our economic resilience – having low debt makes us better able to withstand economic shocks like a downturn in international trade, in our terms of trade (currently very high compared with the long term average – see here), or our exchange rate. There are worrying signs in the US economy. Household debt now stands at $US12.7 trillion, higher than it was during the GFC (see here). Student loans comprise 11 per cent of household debt, up from 5 per cent in the third quarter of 2008. Also, we live in uncertain times; an illustration of this is that on the day the Budget was announced, President Trump announced that the US was withdrawing from the multilateral agreement under which Iran agreed to limit its nuclear aspirations, leading to serious US commentators on international security saying that it has put the world on a path to war.

On these grounds Australia21 would argue that paying down the debt should have been given priority over tax cuts. This is particularly so, given the economic commentary that the Government’s projections of the rate at which the Budget will be brought into balance and the debt will be begin to be paid down are extremely optimistic (see for example the commentary by former Liberal leader John Hewson, Fairfax’s Ross Gittins and Caitlin Fitzsimmons, The New Daily’s Michael Pascoe or The Guardian’s Greg Jericho). It is unacceptable to claim outcomes that are built on unsubstantiated economic projections bearing no relation to recent economic history.

Our priority: Meaningful action on climate change. This must include measures to facilitate investment in renewables, particularly putting a price on carbon. We cannot hope to regulate our way to the meeting of our climate change obligations; too much of our aggregate emissions is produced by small entities that government cannot hope to reach. The most effective and equitable way to reach them all is via market measures that capture the external costs their energy production or usage impose on others.

How the Budget measures up:

Failure to take effective action on climate change is a form of debt. It not only imposes upon later generations the costs of actions that should be undertaken now, it imposes the additional costs of more rapid adjustment, together with the risk of stranded assets. We know what is coming and it’s disappointing that the Budget does not reflect the urgency of the task.

Our priority: Preparing the nation to be competitive in the 21st Century. There is a substantial body of economic literature dating back to the 1960s which establishes that the productivity and hence the competitiveness of the economy is enhanced by investments in education, research & development, and infrastructure with an appropriate business case.

How the Budget measures up:

There is no sign that the current Budget is informed by this ‘investment’ thinking.

Education expenditure is constrained as noted above. This of great concern not only from the viewpoint of its effect on inequality, but from the viewpoint of its impact on competitiveness. Investment in our young people is self-evidently an investment in the nation’s future. While the softening of the parental income test for regional students’ access to the Youth Allowance is welcome, the lack of increase to Newstart and Youth Allowance and nothing much for youth unemployment (except an expansion of the program ‘Transitions to Work’) is a matter for concern. In the words of the Australian Youth Affairs Coalition: “Australia’s 4.3 million young people have been locked out of today’s Federal Budget at a time when the overall budget position is improving and conditions for young people are deteriorating.”

The Foundation for Young Australians also notes that, as usual, discussions about Australia’s future and the role of public policy have largely been shaped by the needs of our ageing population: “An overarching and explicit investment in Young Australians is once again missing in the 2018-19 Federal Budget.” That’s despite the fact that young people are about to inherit the responsibility of caring for an ageing nation. The figures FYA quotes are startling. In 2012, there were more than five working people for every person aged over 65, but by 2042, there will be approx 2.5. The flexible (insecure) nature of the modern workforce will likely see a 15-year-old today navigating a portfolio of 17 jobs in 5 different industries. Already, 1 in 3 young people are un- or underemployed, and transitions from study to work are taking longer largely due to the glaring mismatch between what young people are learning and what employers are looking for. The Budget’s allocation of $700,000 for the Brotherhood of St Laurence to set up a Youth Employment Body to create jobs for long term unemployed young people does not go anywhere near far enough.

Regarding the national R&D effort, CSIRO has taken significant cuts in recent years, the constrained budgets of universities makes it increasingly difficult for them to sustain their historically important contribution to the national research effort, and Australia continues to have one of the lowest national government spends on R&D in the OECD. In June 2016 Merlin Crossley and Les Field of UNSW mapped the government R&D spending in a variety of ways and showed the cuts that have taken place since 2012, commenting on the lack of any sustained funding strategy. There is no sign that the current Budget reverses this regrettable trend, or brings more coherence to our R&D spending.

There is significant provision for expenditure on infrastructure in the Budget, but little sign that it has been prioritised on the basis of thorough examination of the business case for all candidate projects. They are tactical responses to emerging needs that reflect past planning and investment failures (more urban freeways, for example), continuations of long-standing programs (Coffs Harbour bypass), or of dubious priority in the overall national scheme of things (is Tullamarine rail link really a national priority?). We desperately need a comprehensive long-range plan for the development of national infrastructure, prioritised in accordance with fully costed and justified business cases, with the highest priority plans ready to roll as funds become available to initiate them.

Tackling the underlying causes of problems

Australia21 believes whoever is in government should be taking a strategic approach to the long-term issues that face Australian society, tackling underlying causes rather than just reacting tactically to emerging problems:

Population projections suggest that by the middle of the century Sydney and Melbourne will each have a population of eight million. With 7.5 million km² to play with, the Government should be thinking about how it can avoid or delay that outcome. For example it could invest in infrastructure that will encourage population growth in non-metropolitan Australia, rather than simply budgeting for measures that may or may not ease urban congestion. The distribution of population on the eastern seaboard could have been very different if the governments of the 1980s had facilitated, rather than impeded, proposals for fast rail development linking Sydney and Melbourne.

We seem to be budgeting for a continuation of the incarceration of refugees on Nauru and Manus. Are we really saying the people who have been there for five or more years already will still be there in four years’ time? Is that economic and human expense sustainable? Is the government trying to find a solution to this problem, or is it prepared just to keep kicking the can down the road?

Similarly, is there any sign in the Budget papers that we are going to shift away from the failed ‘War on Drugs’ approach to illicit drugs? We seem to be budgeting for a continuation of all that law enforcement, but not on more proven approaches to harm reduction.

As my recent submission to the Joint Committee on Public Accounts and Audit (Submission No. 29 here, with the main narrative here) notes, the government is spending billions ($129 billion from 2012-13 to 2016-17) on private consulting firms undertaking work, much of which would have been core business for the public service. In so doing, it is degrading the capacities of the public service and exposing the Commonwealth to a variety of risks. This appears to be fuelled by the government’s desire to reduce the public service head count. Apart from the fact that reducing the size of the public service is not an end in itself, in my experience this approach often yields poorer service at higher cost.

There is no sign that the Government comprehends the value of the ‘soft power’ that comes from programs like our overseas aid programs, or the projection of Australian perspectives that used to be undertaken by Radio Australia. At the same time as we are slashing our aid budget, we lament the growth of Chinese influence in the Pacific Islands. As the old saying goes, nature abhors a vacuum.

A need for greater transparency

On the subject of transparency, Australia21 notes that the government is not presenting a complete picture of its debt. It is assuming off-budget provision for major infrastructure like the inland rail project, the second Sydney airport and more. This is justified by reference to the notion that they will be privatised one day. For that to happen they would need to operate at a profit, which is so unlikely that no reliance can be placed upon it. This is debt that the Commonwealth will have to service. For more on this subject see this piece by the Grattan Institute’s transport program director Marion Terrill.

A related issue is what appears to us to be the optimistic assumptions noted above regarding the calculations of when and how rapidly the Budget will be brought into balance.

The Government’s rationale for personal and corporate tax cuts also needs to be examined closely.

While it is true that extra money in the pockets of people in the lower socio-economic brackets would stimulate retail spending, jobs and growth could equally be stimulated by well targeted government spending on infrastructure (for which there is a proper business case), higher education, R&D, health, aged care and the like. Indeed, The Age’s Peter Martin is not convinced those tax cuts will actually assist spending at all, calling them “the weirdest collection of tax cuts on record.”

Also, while personal tax cuts may be welcome to those fortunate enough to be in employment, they do nothing for those who do not have a job, including those who are victims of earlier austerity programs, or older people who have lost their jobs as a result of structural change, many of whom will never work again.

The Australia Institute’s Briefing Note on the 2018 Budget explores the relationships between wages and taxes, and shows that working to reverse recent unprecedented wage stagnation is the key to achieving ongoing improvements in living standards, not pre-election tweaks in the tax code.

TAI’s budget analysis finds that:

The boost in disposable incomes for most Australians from these changes will be miniscule, not making any measurable difference to their standard of living.

The biggest cause of stagnating living standards in Australia has been the deceleration of wage increases since 2012. The budget assumes that wage growth will suddenly rebound in coming years to more traditional rates (of 3.5 percent per year). This assumption underpins the government’s revenue forecasts, but there is no plan for achieving faster wage growth.

To the contrary, the government’s continuing labour policies will suppress future wage increases. This includes its own 2 percent cap on wage increases for federal public sector workers — the government is restraining wage growth for its own employees to barely half of what it hopes for the whole economy.

Restoring normal wage patterns would boost disposable incomes for Australian workers many times more than tweaks to personal tax rates and thresholds.

There’s no correlation between lower company tax rates, employment, or economic growth. Common sense shows this, and historical and international data confirm it. #auspolpic.twitter.com/C2thvwex5v

So we await with interest any evidence that the proposed corporate tax cuts will enhance economic growth, unemployment levels or wages. To the extent that any of the extra cash in the hands of major corporates leads to additional investment, the decisions on where to invest will be taken on the basis of opportunities worldwide — there is no reason to assume that investment will take place in Australia, regardless of whether the company is Australian or foreign owned. Conversely, there is no evidence that current tax rates deter investment in those industries for which Australia is a favourable location. We are not likely to see our iron ore industry shift to the US or Europe, no matter what differences in the corporate tax rate there might be. Similarly with offshore oil and gas.

Ensuring transparency is vital to the quality of public debate and the health of our democracy. Public information and education and investigative journalism are a vital part of this picture and the ABC is one of the key players. It is a trusted interlocutor and provides a particularly important service to regional and rural Australia. Accordingly, the cuts to the ABC’s budget are also a matter for regret.

The looming election

One economic commentator has observed that the next election will be about three things – tax, tax and tax. Australia21 believes it should be about far more than that.

It is not just the Coalition Government that needs to show better vision and values. Labor’s Budget documents are also disappointing.

Australia21 is calling on all sides of politics to invest in a longer term approach based on clearly defined principles. We acknowledge this will not be easy: the political ‘gotcha’ game is deeply entrenched and such a major structural and attitudinal shift will take time. But even signs of partial change would be welcome.

Rather than shopping lists and cynical efforts to buy votes, we need our political representatives to be clear about the kind of society they want, how they think we can achieve it, and what they are prepared to do to establish a better framework for future generations. Australia21 urges them to care for our environment and value building sustainable, compassionate communities where there is an openness of opportunity and where the less fortunate (for whatever reason) are not left behind.

We also need constructive debate that allows our communities to help shape society, instead of rhetoric that encourages individuals to lash out against what they are told to fear. Our politicians only need to look at the rise of Trump or the phenomenon of Brexit to see what can eventuate when the pain of real people is ignored: they fight back, and the results are not always in the best interest of the nation. Australia deserves better than that.

For more on this issue, take a look at Australia21’s policy roadmap for 2018:

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